Build up your credit history gradually

If you want to get some form of credit in the future, such as a credit card, mortgage or car loan, it would be worth your while to gradually start building a positive credit history. As a result of the financial crisis, banks have tightened lending conditions and are relying on the quality of information they get from credit registers more than ever before. Having no records about you in these registers is not necessarily a positive thing.

The financial crisis, which has been a favorite topic of the media during the last year, is turning into an economic recession which is affecting the whole world. This has also affected financing, which is now more problematic compared to times when the economy was growing, not only for companies but also for individuals. The first to feel the decline in credit have been businessmen, followed by those planning to buy a house. If you want to get a mortgage, you will be assessed much more than you would have been in previous years. However, even though local banks were checking the financial standing of customers quite stringently even in the past, anyone who has a positive credit history and a sufficiently high income doesn’t need to worry about getting a mortgage from banks.

The fact that banks are more cautious in their procedures has also been confirmed by Lucie Weysserová from the LBBW Bank, who was responding to readers’ questions as part of the mortgage advisory service on the financial website Měš “The financial crisis is reflected in the fact that banks have been more careful lately and their criteria when evaluating credit applications have been stricter. For example, some banks have lowered the maximum amount of credit which can be obtained for a certain amount of collateral,” writes Weysserová.

Why is credit history so important? 
We are slowly approaching an time where you may have problems in getting any type of credit. This may not be due to the fact that you had debt repayment difficulties in the past, but may happen if you do not have any records in your credit history. The bank employee evaluating your credit application won't have any information, and the computer processing the credit application will judge you as a potentially risky customer. It is therefore worth your while to have at least one small loan, which will automatically create a credit history which doesn't show any problems. In the coming years you will not have a chance to borrow large amounts (car lease, mortgage) without having a positive credit history and you will have to start with smaller amounts which you could otherwise cover directly from your bank account.

Credit registers exist in nearly all European Union countries. They help banks and non-banking institutions to evaluate a potential customer’s financial standing. In the Czech Republic the banking market is served by the so-called Banking register of client information (hereinafter referred to as the banking credit register), which was established in 2002, and the Non-Banking register of client information (hereinafter referred to as the non-banking credit register) created in 2005. Today both registers have many members from banking institutions, building societies, leasing and credit companies.

What is unusual about this situation is the fact that any credit obtained abroad cannot be checked by a foreign banking or non-banking company in the same way as it can be done by a local institution. In this case it is necessary for the customer who is applying for credit to request a statement of their credit history to be submitted to the bank where they have applied for credit.

Positive and negative registers
Apart from the “positive” banking and non-banking registers which are operated by CBCB (Czech Banking Credit Bureau) there is also a credit register operated by the SOLUS Association. The latter is a so-called “negative register”, which means that it records only the customers which have difficulties with repayments. If you are unable to get a loan from a bank because you don’t have a credit history, the solution is to ask for a loan from one of the members of the SOLUS register as it is more than likely that you will get it.

The crisis has decreased the pressure on debt 
Statistics from both registers indicate a decline in credit lines and delinquencies (problems with repayments). In the banking and non-banking registers a payment is classified as late if it was made three months after the due date set out in the repayment schedule. 

“Even though at the end of last year the share of financial obligations which had not been repaid for a prolonged period of time had increased, and the overall indebtedness of Czech households continues to grow, when compared to the majority of the original members of the European Union we are doing quite well. For that we can be thankful mainly to the short history of the Czech credit market,” says Zuzana Pečená, Executive Director of the CBCB, which operates the banking register in the Czech Republic.

There is continuing interest in getting credit, but people are being more cautious
The total volume of credit has already exceeded the 1 trillion koruna of October 2008. In the final quarter of last year the volume of credit grew by 60 billion. In the middle of 2007 the total sum of credit was just slightly below 800 billion koruna, and so during the 18 months leading up to the end of 2008 the amount had increased by 25%. The reason behind this was a prospering economy and the overall state of the society, which considered borrowing to be a normal thing, and where it was quite usual to borrow money even for every-day things such as vacations or for buying consumer electronics. 

The turning point only came after last year’s summer vacation, when the U.S. banks started to fall. This resulted in a spill-over of problems into Europe and therefore into the Czech Republic, which was reflected locally in the significant slowdown of credit growth. The decline is evident when comparing the last quarters of 2007 and 2008 which shows a decline in new loans of 17%. In absolute terms this represents 12.5 billion koruna. This falling trend has been evident since May 2008.

Among the most affected areas is consumer credit, which is accessible to a greater number of people, but which at the same time charges higher interest rates than mortgages. According to statistics from the banking register, mortgages are classified as the lowest risk together with building savings loans. There is a simple explanation for this. As far as the administration of long-term loans such as mortgages or building savings loans are concerned, banks and building societies are mainly concerned about the customer's ability to repay the loan and therefore they lower their risk when they are lending money for a long period of time. The situation in the credit market in the Czech Republic is not so bad, because housing loans represent roughly 75% of the overall credit portfolio. As a result, mortgage repayment delinquency represents 0.225% of the total volume of outstanding mortgages and in case of building savings this amount is only 0.029%. Also in this case delinquency is measured by the frequency of installments which are three or more months past the due date.

Non-banking register: leasing and financing companies 
The non-banking register is primarily made up of leasing companies, which with 150 billion koruna invested in financial leasing represent 68% of the entire volume of loans. The statistics provided by the non-banking credit register show that the share of unpaid obligations has increased. Between July and November of last year the number grew from 1.7% to 2.34%, only to drop to 2.1% in December. In overall terms this represents a total of unpaid obligations of 4.8 billion koruna.

“One of the reasons for the decline in the value of non-banking loans is people’s fear of how the economic crisis will affect them. And that is why they are waiting before they buy a car through a lease purchase,” says Karel Kolář, Executive Director of the LLCB, which operates the non-banking register in the Czech Republic and he adds: “Continuing expectation that prices of cars will go down, or whether or not the government will implement the so-called scrappage scheme on purchases of new cars also play a big role here.” 

Who is in the highest risk group? 
Among the riskiest recipients of banking and non-banking credit are mainly young people of ages 18 to 24 who have problems in repaying consumer loans, or who have taken out loans or mortgages impulsively. The lowest risk group comprises people of ages 25 to 44. 

The simplest way to find out whether you can take out a loan is to look at the difference between your income and expenses and base your decision on the results. If the difference is lower than the expected loan installments, you should take a closer look at your expenses. But in spite of this simple financial analysis and any potential adjustments you may make as a result, you should not take out a loan if you are expecting your wages to be lowered or to lose your job as a result of the economic recession.